How Astute Marketers Use The 80/20 Rule For Customer Segmentation
Do you ever wonder why large corporate marketers, the companies who send you junkÂ mail and catalogues, are so successful?
It’s because they’ve mastered the balance ofÂ recency, frequency and money among their customers.
I call this combination RFMÂ in my book “80/20 Sales and Marketing”. The idea is about which customers you payÂ attention to in your business, based on who’s paying attention to you.
- Â Recency: How recently has your customer purchased? Have they boughtÂ something in the last 90 days?
- Â Frequency: How often has your customer purchased? Do they purchaseÂ repeatedly?
- Â Money: How much has your customer spent, and which customers spend theÂ most?
The junk mailing companies have RFM down to a science. They know they can alwaysÂ acquire new customers because they know exactly who to send their lousy letters to —Â and when. In fact, RFM is standard practice in direct marketing using mailing lists, but many marketers areÂ unaware of it.
Each of your individual customers will have a specific RFM: a combination of whenÂ they spend, how much and how often. This means you can focus limited resourcesÂ on a relatively small fraction of your customers and get huge returns.
One percentÂ of what you own and do will produce 99 percent of the results. You’ll have 80/20Â leverage over your customer base.
How To Apply RFM
To use each customer’s RFM in a valuable way, throw the information into aÂ spreadsheet. Rank customers from most to least recent, from most to least frequentÂ and from most to least money spent. Score them on a scale from 1-10 in eachÂ category, and say, “I only want customers with an R+F+M score of more than 20.”
This mindset will save you piles of money if you’re planning to send direct mail orÂ use other costly marketing techniques. You can also differentiate your top few dozenÂ customers and give them the royal marketing treatment. These are the customersÂ with RFMs that represent huge returns on investments, so don’t just send them aÂ letter. Think bigger: a special package, a Christmas gift or even a wine and cheeseÂ party!
Even if you’re an email marketer, the RFM theory still applies to you. The biggestÂ mistake email marketers can make is assuming it doesn’t.
Your customers’ level ofÂ Â interest in your email list mirrors the 80/20 Power Curve. The bottom 10 percentÂ don’t want to hear from you ever again, and the top 1 percent want to hear from youÂ once a day. So if you mass-email a sales offer to a list of 10,000 past customers, theÂ lion’s share of your sales will come from the top 500 people on the list. You’re justÂ irritating the bottom 9,000, and you’ve taught them to ignore your emails.
Not only do smaller email lists reach a more nuanced customer base, but they’reÂ also more likely to get delivered. Large ISPs like Yahoo Hotmail and AOL let singleÂ messages through unhindered. Anything larger than an email blast of 100 to 200Â names is much more likely to end up in spam filters.
Build Email Sublists
Instead, you should be building email sublists. Segment your customers in six to 12Â categories according to the products, services and information they’re interested in.
There are several ways to segment an email list. Ben Hunt and I both use InfusionSoft, which allows youÂ to “tag” people who bought a certain product, opened a certain email or clicked onÂ a certain link. Then create content to match the wants and needs identified on theÂ sublists, and suddenly your email lists will be far more responsive.